Mike's Daily Comment

Taxpayers Deserve the Whole Story

Lots of public sector contracts are about to be negotiated and the norm is to talk about wages but it’s the benefits that can be the biggest cost. It’s about time taxpayers got the facts – after all they’re paying for it.

Goofy Award, Shocking Stat & Quote of the Week

Goofy Award 

It’s the funniest, most absurd statement of the campaign and that’s saying something. Think of all the competition in a sea of inane, over the top remarks – and it’s not even close.

Shocking Stat 

Canadians especially in BC and Quebec…and Ottawa – don’t seem to have any idea how much the slowdown in Alberta costs the whole country. 

Quote of the Week 

Famed economist Thomas Sowell on how we no longer count our blessings and instead focus on our unfulfilled desires. 

Mike’s Editorial – Where Will Government Go For The Money?

We need billions more for existing programs – tens of billions more for new promises. When the next downturn hits – the deficit will explode and governments will go where the money is – your home.

Greater Vancouver Home Prices Headed Lower for Longer

September came and went without so much as a hello or good bye in Vancouver Real Estate. The Greater Vancouver data shows not much movement in September with prices moving slightly down from 1.560 million in august to 1.507 million for yet another re test of the 1.5 million price point. This is the highlight of the September data, as this shows we are back to the prices experienced in June and July. However this re test of the horizontal orange line is a break of the ten year trend. With this break we know by around the first quarter of 2020 the prices will dip below the 1.5 million threshold and re test the 1.4 million price point indicated by the lower orange horizontal line in Greater Vancouver’s current Market Cycle. This movement down could occur before the aforementioned Q1 of 2020, but due to the stress test we think that the market has some pent up demand that still needs to purchase. Once that blip is over prices do indeed test 1.4 million.

The result of this movement means those that will be up for the 5 year mortgage renewal in 2020 will have lost all equity gained over the past years. In Feb 2015 prices first surpassed 1.4 million. This is where the market will return in the near future. Even more troubling we forecast the market to continue in to be tumultuous until 2021 when the market sees a base. This means those who purchase properties during the peak in detached prices of 2016 will be in for over $400,000 loss of equity when they go for their mortgage renewals in 2021. We do not mean to instigate fear, however this is the reality many owners will face in the upcoming years. We believe it is better to know what you are facing rather than being an ostrich with your head in the sand.

Greater Vancouver sales seemed to have hit their heads three times around 930 sales indicated by the horizontal green line in the chart above. This has seemingly caused the sales to be range bound between 930 and 620 in a given month. We anticipate this trend to continue until the conservative downtrend in sales has been broken likely in 2021.

Again not much movement with the data in September for the Inventory. With just under 6000 active detached properties available, just below the middle of the uptrend. With the downward pressure of the market prices we have noticed that stagnant listings do not stand much of a chance in this current market. You need to separate your listing from the competition and really the only way to do that is by being sharp on your list price.

Money saved is money earned. Since our initial forecast that the Greater Vancouver Market had indeed topped out and prices would begin to trend lower. The market has realized a $360,000 price loss. For an individual report please visit Eitel Insights online.

Greater Vancouver Condo Prices Realize the First Bump in Over a Year

 

Greater Vancouver prices rose over 20 thousand to $673,000, now that doesn’t sound like much and it isn’t only a 3% bump. What is interesting though, is this broke the initial downtrend that has been established since the peak occurred in April 2018 at a price point of $747,000. Also the first slightly significant increase to the average sales price over the past year. This is not cause for celebration however, the market has not bottomed nor close to it. What has transpired due to the break in this initial downtrend is the market will establish another likely more conservative downtrend.

As is common sentiment the condo market lags the detached market in most instances. Vancouver is no different, during the initial downtrend of the detached market when prices hit the middle of the market cycle then bounced higher as psychologically the market does not want to go lower than this point. Until reality sets in and forces to test lower previously established prices before the market reaches the bottom.

This is what is going on here and now in the condo market. Prices will attempt to stay above the lower of the two yellow lines ($635K) in the market cycle. Once this attempt fails, prices will again turn lower during 2020 and 2021. As prices continue to decrease the market will re-enter the ten year uptrend indicated by the black uptrend line. And ultimately will indeed drop to the anticipated bottom of $525,000 by 2022.

Sales over the past quarter for the Condo Greater Vancouver Market have been somewhat stable, staying above 1100 sales. Which is smack dab in the middle of the conservative downtrend. With the most recent sales prices coming in at $673,000 only representing a loss of 10% from the peak. The challenge in qualifying for a mortgage is difficult and will remain so as the major banks are planning on further losses to this asset class. As a result they are being very tight with their borrowing metrics. Not to mention the Greater Vancouver Condo market still needs to see an additional 10% losses from here before realizing the stress test mitigation that is currently going on in the detached market.

Inventory is right up against this aggressive uptrend that has been established since the beginning of 2018. Similar to what we forecasted with the price point when the data is up against the trends we will see an obvious reaction one way or the other. Indicating either there will be a break to the current uptrend and a creation of the next or we will see a snap upwards in October’s active listings numbers. Regardless of the short term trend the overall trend for the inventory indicates that during 2021 and 2022 inventory will be a record high levels.

Dane Eitel is the founder and lead analyst of Eitel Insights. Click here for more information.

What Economic Issues are Impacting You

As we head into the fall and the days become shorter, it’s time we have a cold hard look at an economic issue which may impact you.

That Hissing Sound

If you live in the Vancouver region, or if you have real estate holdings in the area, you are likely very aware of the major correction in real estate prices.  Additionally, if you have read or heard our thoughts at McIver Capital Management, on market corrections in general, this one should come as no surprise.

Universally, all markets correct, and they always will. Commodity, precious metals, stock and bond markets and of course real estate are no exception. While this is true, during the period in which a market is rising quickly, many people feel as though the market never will. This is, in fact, exactly what perpetuates a rising market. As these feelings of inevitability and invincibility take hold of more market participants, rampant speculation begins, pushing prices even higher – and therefore reinforcing the flawed original feeling that the market will never go down again. This creates the speculative bubbles which often end badly for most and that everyone seems to claim, in hindsight, that they clearly saw coming.

But we did see it coming and spoke of it often in our publications, talks and speaking engagements over the past 3 years. The reason why we were confident was because of a very powerful force in nature called ‘normalization’.  It’s the same force of nature which makes 1,000 foot tall trees extremely unlikely. We also use market normalization to great advantage on your behalf in our sophisticated investment process.

Market normalization

Simply stated, market normalization is the tendency for all markets to return to their long-term average rate of return from a period of either outperformance or underperformance.  If, for instance, the market for a particular asset has a 5% long-term rate of return (measured over several decades or potentially even centuries depending upon the asset) and has recently experienced several years of 20% growth, it makes sense to limit or eliminate your exposure to it because it will indeed normalize.  The manner in which a market normalizes can vary greatly.  It may fall quickly and give up all those excess gains above 5%, all at once. Alternatively, it may also simply go flat and not move either up or down and normalize through time by generating zero return. Most often, a market will normalize by experiencing a mixture of the two; falling somewhat and then going flat for several years.  Either way, exposure to an asset class which has experienced long-term outperformance should limited or eliminated altogether.

The same is also exactly true of an asset that has recently underperformed its long-term rate of return, but clearly it would be in reverse. This would be an asset that it would make sense to increase your exposure to.

What has taken place in Vancouver real estate is a perfect example of market normalization. The only unique thing about this normalization is that the trigger for the correction was taxes.

Politicians Don’t Fix Bubbles

About 3 years ago the narrative regarding Vancouver real estate changed from referring to it as a ‘real estate bubble’ to calling it a ‘housing crisis’, and we knew then that the fix was in.  Politicians do not fix bubbles because too many people are at the party making money.  But they do smell an opportunity when the word ‘crisis’ is added to the narrative.  And they pounced, each level of government eager to get a hand on the profits.  What resulted is the present cocktail of real estate taxes, each claiming the moral high ground because the taxes are aimed at ‘fixing’ the ‘crisis’.

We now have the “Empty Homes Tax”, the “Vacancy and Speculation Tax”, the “Foreign Buyers Tax” and perhaps the most cynical of all being the misnamed “School Tax” (which is simply capital appropriation by the Province). The most ominous potential new housing tax, hinted by the federal Liberals when they began making you report the sale of your principal residences for the first time on your tax return, is a potential capital gains tax on your principal residence.

Sand In The Machine

If you throw enough sand in the machine, eventually the machine stops.  That’s just what happened to real estate. And it’s much worse than most in the real estate industry would have you believe.

The problem with the real estate industry is that there is virtually no one actually on the side of the consumer.  Real estate agents, the real estate boards, banks and lenders, developers and real estate marketing agencies are all on one side of market and all want you to believe that the market will virtually always rise.  On our side, we effectively have just the Bank of Canada, whose mandate is to protect the economic future for Canadians.

The reality on the ground is that depending the part of Greater Vancouver you are reviewing; property prices have fallen as much as -30% from the most recent (2019) assessments and as much as -50% from the assessment two years ago.

This is significant on many levels.  Those that had been speculating, particularly on borrowed money, may have been caught without a chair when the music stopped and are now being forced to sell. Many of these investors did not borrow from traditional lenders and instead borrowed from dark money pools made available by private lenders. These high interest rate loans were made on the assumption that real estate prices would continue to grow at 15%+ per year.  Clearly in financial distress, these sellers are selling at prices which continue to make the entire industry and real estate market unsettled. These sales have also caused some shock waves on both social and traditional media when they have been reported.

Others who have speculated in real estate, but in a less aggressive fashion and with less leverage, will be next to sell, but will likely only do so when the market bottom has been established.

And for everyone else? Billions of dollars in wealth has, fairly suddenly, been eliminated from the local economy. While much of this home equity wealth was only on paper, the evaporation of it has a huge impact on the decisions local consumers make. For most us, our equity in our home is our primary financial asset and the cornerstone on our financial safety.  How confident will Vancouverites now be about buying that new car, or going out for that fancy dinner? It’s very likely that many will be less confident to make those spending decisions. This will impact our local economy.

Sand Stays In The Machine

A snap back recovery is very unlikely due to the sand still fouling the machine.  Even if events overseas increase the number of people wishing to move to Vancouver, the punishing potpourri of taxes remain.  Accordingly, we can expect no massive influx of foreign capital to drive this market back up to the dizzying heights of 2 years ago.  Additionally, the sting and physiological damage of this correction will remain for some time.

For the record, I don’t pretend to be a real estate expert. However, we at McIver Capital Management certainly are experts in ‘markets’ in general.  Very likely this market normalization correction will result in a -30% to -50% initial correction off the highs from two years ago (which has happened in some areas of the local market already), then eventually bottom and stabilize. It’s likely that the market will remain fairly flat for some time after stabilizing.

We have no crystal ball, but governments change and in time the various tax regimes will change with them.  As those changes takes place, optimism will return, and the next real estate cycle will begin.  Hopefully we all will be wiser the next time.

Neil McIver is Sr. VP and Portfolio Manager at McIver Capital Management at Canaccord Genuity.

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Of course that was before he entered politics. Consider that the majority of Canadians would have to invest $55,000 per year to match the average pension for federal employees.